Pension Funds Sue Shell Seeking Damages, Governance Changes

Two pension funds filed suit Friday against more than two dozen directors and officers of the Royal Dutch/Shell Group and their accounting and audit firms PricewaterhouseCoopers International and KPMG International.

The suit follows the company downgrading its proven oil and natural gas reserves four times since Jan. 9. The company reduced reserves as of Dec. 31, 2002 by about 23 percent, or 4.47 billion barrels of oil equivalent. Reserves are an important measure of an oil company's performance and future value, as the amount represents how much oil and gas the company expects to commercially pump to the surface.

The suit accuses the Shell executives of "breach of fiduciary duty, abuse of control, mismanagement, fraud and unjust enrichment," among other charges, the Oil & Gas Journal reported. The suit also contends the accounting firms, which had unlimited access to information in all of the companies, were guilty of "accounting malpractice" and "professional negligence."

The pension funds that brought the suit, filed in New Jersey Superior Court in Middlesex County, are UNITE National Retirement Fund, based in New York City, and the Virginia-based Plumbers and Pipefitters National Pension Fund. Members who invested in the Shell Group through the pension programs saw Shell’s net income drop as the scandal unfolded.

The suit seeks monetary damages and far-reaching corporate governance changes that include new controls on insider stock sales, stricter internal audit controls, and a new method of awarding executive compensation.

"The Shell Group of companies has an arcane structure that for years has frustrated investors' attempts to obtain reliable information and influence the board's policies," said Bob Monks, corporate governance advisor to Lerach Coughlin Stoia & Robbins LLP, counsel for the shareholders pressing the suit.

Shell has already announced that it would consider changes to the way directors are nominated to the board along with a proposed simplification to the Shell Group’s structure and governance. The Shell Group is run by two separate boards — the Royal Dutch Petroleum Co. in the Netherlands and the Shell Transport and Trading Co. in the UK. The Royal Dutch group is planning next year to propose abolishing the company’s priority shares, which allows for easy nomination of directors to the board.

The shareholders behind the suit want to nominate three directors and vote on merging the two boards.

"Although we read lately of Shell's reported willingness to change the way it does business, in our experience Shell has been long on promises and short on delivery," said Bruce Raynor, president of UNITE and chairman of the board of its pension fund. He added that directors of foreign companies "cannot be allowed to sell and list securities in the United States and then violate Sarbanes-Oxley without being held accountable."

Meanwhile, at the Shell Group’s annual meeting, held concurrently in the Hague and London Monday, Securities and Exchange Commission representatives questioned 30 employees, executives told the Associated Press. The SEC began an informal investigation of the reserves issue in February, following the first downgrade.